Interest rates: Bank of England holds rate at 4.25% in blow to Rachel Reeves
A majority of members of the Bank of England's Monetary Policy Committee have voted to hold rates.
Bank of England retains interest rates at 4.25%
The Bank of England has held interest rates at 4.25% amid mounting fears the conflict between Israel and Iran will escalate. The decision on Thursday (June 19) by the bank’s nine member Monetary Policy Committee (MPC) was widely anticipated.
However, the MPC was split over the decision, with six voting to hold and three wanting to cut the Bank's Base Rate. Most experts had predicted the Bank would hold interest rates amid sticky inflation figures and an uncertain economic outlook.
The Base Rate significantly impacts the cost of mortgages and loans, and influences the interest rates banks offer on savings accounts.
It peaked at 5.25% in late 2023, but policymakers have reduced it to 4.25% in the months since as inflation dropped to more manageable levels.
It’s currently rising at a pace of 3.4% - far lower than the 11% highs seen during 2022’s energy crisis, but still higher than the Bank’s 2% target. The Bank of England typically raises interest rates when inflation is high to curb spending and slow price increases.
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Rate hold brings 'welcome stability' for people planning retirement, expert says
Lily Megson, Policy Director at My Pension Expert, has said that for people planning their retirement today’s decision to hold interest rates brings "welcome stability".
She said: "It supports stronger annuity rates and competitive savings products, key ingredients for building a secure future. But with inflation still lingering and household budgets under pressure, it’s a smart time to reassess your pension strategy. Ask yourself whether it still aligns with your long-term goals. If they don’t, take action.
"Financial advice is crucial. Making the most of today’s conditions can give you the clarity and confidence to navigate change and stay on track for the retirement you want."
Rachel Reeves' choices mean interest rates are staying higher for longer, Mel Stride says
Shadow Chancellor Mel Stride has said interest rates are staying higher for longer because the Chancellor Rachel Reeves' choices have driven up inflation.
He said: "Labour’s Jobs Tax and reckless borrowing are killing growth and fuelling inflation - making it harder to bring interest rates down."
Chancellor Rachel Reeves' raising of employers' National Insurance contributions came into force in April.
The 1.2% hike in NI costs for employers led to warnings of job cuts, wage freezes and plans for investment being put on hold.
Consumers have also been warned employers would look to offset some of the rise in costs by hiking prices.
What does the decision mean for mortgages?
The Base Rate hold may disappoint some mortgage holders looking to switch to a new deal. According to figures from UK Finance, about 1.6 million fixed-rate homeowner mortgage deals will end or have already ended in 2025.
Nicholas Mendes, Mortgage Technical Manager at John Charcol, said markets still expect a cut or two later this year and possibly as soon as August, but the rate path is still "anything but settled".
He added: "Borrowers would be wise not to wait passively. If your current fixed deal is due to end this year, it's worth reviewing your options early, as some lenders allow new deals to be secured up to six months in advance."
Mark Harris, Chief Executive at mortgage broker SPF Private Clients, said borrowers do have "some good news" in that lenders have reduced mortgage rates and eased criteria in recent weeks.
He said: "This rate hold was largely expected by the markets but if swap rates (which are used by lenders to price mortgages) fall, this will enable lenders to price their fixed-rate mortgages more keenly, easing borrowers' affordability concerns."
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, said: "You only have to look at recent moves in the mortgage market to see how tough the banks are finding it to price their deals right now. Recently we’ve seen some banks cut rates, some increase them, and some do a combination of both.
"You’d be forgiven for thinking that the Bank of England holding rates might bring some stability, but while that’s true for tracker rates, fixed rate deals are another matter entirely. They’re facing a strange combination of factors, with expected rate cuts pointing to a future of lower rates, and rising bond yields raising the cost of fixed deals and pushing rates up. Neither of these things look set to change in a hurry, so we may need to get used to uncertainty for a while.
"At times like this, we’ll get some low rates in the mix every so often, so it will be key to snap up opportunities as soon as they appear."
Jenny Ross, Which? Money editor, said: "Anyone concerned about meeting their payments should speak to their lender as soon as possible - they're obliged to help."
Pound dips then recovers after rates held
The pound dipped slightly after the Bank held interest rates but quickly recovered ground.
Sterling had risen against the dollar steadily before the decision, sitting roughly 0.15% higher shortly before the announcement at midday.
The pound dropped into a marginal decline after the Bank confirmed its decision, but it has largely recovered since, sitting 0.11% higher at 1.343 against the US dollar for the day so far.
What does the decision mean for savers?
Mark Hicks, Head of Active Savings at Hargreaves Lansdown, has said savings rates are likely to hold relatively firm.
He said variable rates owe a lot to the Bank of England, so a hold means less movement in the market.
Mr Hicks added: "Fixed rates, meanwhile, are being pulled in two different directions, so lack of movement here hides the fact there’s a lot going on.
"The markets are expecting two more rate cuts this year, so all other things being equal this would put downwards pressure on savings rates.
"However, at the same time, the bond market is busy putting upwards pressure on savings rates."
The expert explained that this means there will be "little movement" in the savings market, with "small tweaks" in one direction or the other.
Mr Hicks said: "It also makes forecasting harder. An awful lot depends on global politics, which has proven incredibly difficult to predict in recent months.
"It means that instead of trying to second-guess global political developments, it makes sense to pick the right type of savings account for your needs and checking online banks and savings platforms for the best possible deals."
Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: "Loyalty does not pay so it comes down to savers to proactively review rates and switch their account if they are getting a poor return on their hard-earned cash.
"It is vital savers look beyond the high street banks and instead take notice of the many challenger banks and mutuals competing in the savings arena.
"The biggest high street banks pay an average of 1.56% across easy access accounts, but even this pitiful return is being eaten away by inflation, which sits above its 2% target.
"It may be convenient to leave pots with such prominent brands, but it's costing savings in better returns available elsewhere."
Energy prices and Trump's tariffs add to concerns for UK economy
The minutes of the MPC's meeting note that there have been "rapid geopolitical developments", adding: "Energy prices had risen owing to an escalation of the conflict in the Middle East.
"The committee would remain vigilant about these developments and their potential impact on the UK economy."
It echoes similar remarks made by the US central bank which also opted to keep interest rates on hold yesterday.
Global oil and natural gas prices have surged in recent weeks, which threatens to push up energy costs in the UK.
The MPC noted that US President Donald Trump's tariff policy was posing risks to global trade and continuing to create uncertainty.
But it said deals struck between the US and other countries, including the UK, mean the direct impact of the "trade shock" on global growth could be smaller than it had forecast last month.
'No reason for a cut today', expert says
Reaction is starting to come through. Marion Amiot, Chief UK Economist at S&P Global Ratings, said "volatile" and "somewhat unreliable" data amid rising external shocks and uncertainty have continued to "blur the picture" for MPC members.
She said: "With GDP (Gross Domestic Product) posting strong growth in Q1 and inflation at 3.4%, there was no reason for a cut today.
"Looking forward, the Bank of England will continue lowering rates gradually – we expect one rate cut per quarter until it reaches 3.5% in Q1 2026, as more slack is needed to squeeze out all excess demand."
She said: "For now, we expect inflation to stay above 3% this year, but eventually weak demand and shrinking margins should limit the ability of firms to offer higher wages and pass on higher prices, leading to a fall in inflation back toward 2% in 2026."
Rates 'remain' on a 'gradual downward path', Bailey says
BoE Governor, Andrew Bailey, has said interest rates remain on a gradual downward path, although the Bank has left them on hold today.
He added: "The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market.
"We will be looking carefully at the extent to which those signs feed through to consumer price inflation."
Who voted to cut the rate?
Three members of the MPC - Swati Dhingra, Dave Ramsden and Alan Taylor - voted to reduce the rate by 0.25 percentage points to 4%.
Bank holds base rate at 4.25%
The MPC's nine members were split over the decision however, with six voting to leave rates unchanged and three wanting a cut.
'Very hard' for Bank to raise rates with CPI so far above 2% target, analyst says
Laith Khalaf, Head of Investment Analysis at AJ Bell, said it will be very hard for the Bank to raise interest rates when CPI is so far above target and with further potentially inflationary pressures coming from higher energy prices and the Chancellor Rachel Reeves' National Insurance hike.
He added: "Employers might seek to defray the cost of higher rates of National Insurance through less hiring and lower pay awards, but some of it will inevitably feed through into prices. The headline CPI figure now stands at 3.4%.
"This of course tells us what happened over the last 12 months, while the Bank analyses inflation looking forward over three years.
"Nonetheless, the Bank of England would have a lot of explaining to do if it were to cut interest rates with inflation more than 1% above target.
"The public have already been bitten once by the idea of transitory inflation, so the Bank will be naturally shy to peddle this narrative again."
Bank tipped to make just one interest rate cut this year
Monica George Michail, Associate Economist at the National Institute of Economic and Social Research, has said NIESR is forecasting inflation to stay above 3% for the rest of the year.
She said this is due to "persistent wage growth and the inflationary effects from higher Government spending".
Ms Michail continued: "Additionally, the current tensions in the Middle East are causing greater economic uncertainty.
"We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year."
Interest rate decision to come after ONS says inflation was 3.4% in May
Interest rates are used as a tool to put a lid on unruly inflation, in line with the Bank's task of keeping the rate of Consumer Prices Index (CPI) at 2%.
Rising food prices have been putting pressure on overall inflation recently, with the latest data from the Office for National Statistics (ONS) showing food and non-alcoholic drink prices rose by 4.4% in the year to May.
This was the highest level in over a year, with items such as ice cream, coffee, cheese and meat spiking last month. Chocolate prices soared by nearly 18% annually, a record jump for the confectionery.
The overall CPI rate came in at 3.4% in May, slightly higher than the 3.3% rate most economists had been expecting.
What is the Bank expected to do?
Most experts predict the MPC to hold the base rate at 4.25% this month.
The Bank's governor Andrew Bailey has been keen to stress that the committee wants to take a "gradual and careful approach" to reducing rates while monitoring changes in the UK and global economy.
Sticky inflation and an uncertain global economic outlook - compounded by President Trump’s tariffs - have led experts to forecast the MPC to maintain the bank rate in June, with just one more cut predicted this year rather than two.
When will we hear the Bank of England’s decision?
The Governor of the Bank of England typically presents the recommendation on whether to maintain, increase, or decrease the base rate a day before the official announcement.
This recommendation is then subject to a vote by the Bank's Monetary Policy Committee (MPC), which is responsible for setting the rates.
As expected, the majority vote prevails, and in the event of a tie, the Governor casts the deciding vote.
Usually, the minutes of the meeting and the final decision are released at 12pm.
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